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Bowl Leader
I’m right there with you - 5.625% here. I am moving most of my excess funds into the market but starting to slowly make extra principal payments ($1-2k/mo) as I’d like to have the mortgage paid off by the time I retire.
Two questions to help analyze this. No wrong answers, just will help reveal your inclination / move you one way or the other.
1. What's your marginal tax rate?
5.5% / (1-Tax) = Return hurdle
2. Do you think buying stocks at 40x earnings will beat that hurdle?
Unless you live in a gingerbread house
Subject Expert
Tax is a big factor.
Are you deducting mortgage interest?
Are you maxing out retirement accounts?
If answer is no, and yes it’s an easy decision to pay off the mortgage for me.
If it’s more tax neutral.
If you would otherwise have greater than 0% allocation in your portfolio. I’d sell those and pay down.
If you are at 100% equity allocation mindset then probably let the mortgage rise
Mentor
The market averages 7% over the long run. S&P was up 16% last year, and 23% the year before. That probably means that we’re due for a down year, but I’d say 5.5% is right around the threshold where it doesn’t make sense to aggressively pay down your mortgage once you take taxes on gains into consideration.
Personally, I’d choose the liquidity of market equities over the increased “frozen” equity of your home. But some people might eye a refi once the buydown gets to be significant enough, which would significantly reduce monthly debt obligations, and I can’t blame someone who chooses that path.
The cap rate for a SFH in my area is around 3%. If it’s your primary, cap rate could potentially be around 4%.
At 5.5%, for each dollar that you borrow, you’d technically have a negative carry of around -1.5%.
Home prices appreciate around 4% a year average, so you could still make net 2.5% to borrow the money. Assuming 20% down, that’s around 12.5% return on your first year (but remember to adjust down for closing costs).
From an investment perspective, might as well buy an index fund, but it may not be a completely bad idea if you value owning your home.
Real estate produces rent whether the owner lives there or a tenant does. It has equivalent value which is the market rate of rent and price.
As an occupant, you are simply consuming what your property is producing. It would be similar if you own an investment property in California, and you use the rent received to pay your rent in New York. Net-net, it is the same.
All that to say that the calculation method does not change whether the property is owner occupied or not.